GROWTH RECIPE: POLITICAL & FINANCIAL STABILITIES
Jan 9 - 15, 2012
Economic growth is the increase in value of the goods and services produced by an economy. The gross domestic product (GDP) in Pakistan expanded 2.39 percent in the second quarter of 2011 over the previous quarter.
Historically, from 1952 until 2011, Pakistan's average quarterly GDP growth was 5-per cent reaching an historical high of 10.22 percent in June of 1954 and a record low of -1.80 percent in June of 1952.
The economy has suffered in the past from decades of internal political disputes, a fast growing population, mixed levels of foreign investment.
Growth is usually calculated in real terms, i.e. inflation-adjusted terms, in order to net out the effect of inflation on the price of the goods and services produced.
In economics, "economic growth" or "economic growth theory" typically refers to growth of potential output, i.e., production at "full employment," which is caused by growth in aggregate demand or observed output.
The real GDP per capita of an economy is often used as an indicator of the average standard of living of individuals in that country, and economic growth is, therefore, often seen as indicating an increase in the average standard of living.
However, there are some problems in using growth in GDP per capita to measure general well being. GDP per capita does not provide any information relevant to the distribution of income in a country.
GDP per capita does not take into account negative externalities from pollution consequent to economic growth. GDP per capita does not take into account positive externalities that may result from services such as education and health.
Financial experts told PAGE that as per estimates, the GDP growth is likely to settle in the range of 3-4 percent by the end of financial year 2011-12.
According to them, coordinated documentation, transparent collection, an equitable plan to capture all commercial businesses and institutions into the tax net, a restructuring agenda for loss-making public state enterprises (PSEs) and a credible enforcement mechanism are need of the hour.
The international monetary fund (IMF) had forecasted a challenging current financial year for Pakistan, with its current account balance turning into deficit and security situation and global risk aversion restricting capital inflows into the country.
The experts believe that structural reforms aimed at removing constraints to growth especially in the energy sector, and strengthening of public finances including tax reform, improving the quality of expenditure by raising the share of spending in priority areas such as health, education, and infrastructure, manage fiscal decentralization, and improving debt management are direly needed.
The World Bank in its recent report titled 'Pakistan Country Partnership Strategy FY2010-2013' has warned that Pakistan is expected to pay a price for leaving the IMF program.
The report pointed out that in the presence of IMF program, the GDP growth was expected at 4.5 percent and in the absence of this program GDP growth is likely to decline to 3.5 percent to 3.6 percent for ongoing fiscal.
The WB report has projected that Pakistan's medium-term growth outlook could be improved by ensuring significant increase in tax to GDP ratio ranging between two to three percent of the GDP by 2012-13.
The report highlighted that the external debt-to-exports ratio rose to 220 percent in 2008-09, and is projected to peak at 273 percent in 2011-12 and start thereafter gradually declining.
However, debt sustainability analysis suggests that external debt service remains manageable although there are potential risks to this assessment from sources such as lower than projected growth and foreign direct investment (FDI), and higher than projected current account deficit, interest rates and exchange rate depreciation.
A recent investment climate survey indicates that governance constraints are critical to the overall business environment.
Despite improvements in the business, governance interface, firms' perception of corruption and crime have worsened. Between 2002 and 2007, the percent of firms citing corruption as a major constraint to doing business rose from 40 to 57 percent. Overall, almost half of all Pakistani firms reported at least one incident of bribery.
The report said that the priority lending program in Pakistan amounts to an estimated $3.7 billion (IBRD-IDA) through FY12, equivalent to about 60 percent of a total potential lending envelope of up to $6billion during the 4-year CPS period (FY10-13).
According to experts, tax collection has failed to improve since the late 1990s, and is among the lowest in the world. The tax-to-GDP ratio recovered to 10.9 percent in 2006-07 but due to the economic crisis, dropped afterward.
Tax evasion is rampant and there is a vast network of special treatments and exemptions backed up by powerful vested interests, they said, adding: "Shortage of energy is currently considered to be the main constraint to economic activity."
Pakistan real GDP growth remained the lowest at 2.4-per cent in 2010-11 among the regional countries on the weak external factors, bad governance, and poor performance of its industrial sectors.
On the contrary, India, Sri Lanka, and Bangladesh posted growth of 7.8-per cent, 6.3-per cent and 7-per cent respectively. In this scenario, Pakistan will be surviving to maintain its strong economic position in the region until the political and financial stability come in the economy for long-run.
The current level of overstaffing, corruption and wastage, and politicized unions in the public sector enterprises (PSEs), make for a very challenging environment. PSEs need to be put back on the policy agenda; at the very least, credible management teams and a phased reform agenda must be formulated.
The economic costs of the energy shortage are understated.
The primary impact is on small and medium size manufacturing units and service providers, which are not properly documented and therefore do not show up in our GDP numbers. Furthermore, the loss of employment is more severe, as these units tend to be labor intensive. The sociopolitical unrest triggered by the energy shortage in many parts of the country, is ominous.